What changed
The statutory minimum CRR of 3% of net demand and time liabilities for Scheduled Primary (Urban) Co-operative Banks was removed effective April 1, 2007, following the Reserve Bank of India (Amendment) Act, 2006. RBI now has the power to prescribe CRR without any floor or ceiling. Additionally, interest payment on CRR balances maintained by these banks was stopped from the fortnight beginning March 31, 2007.
What it means for you
UCBs now face a more flexible but potentially higher CRR regime, as RBI can adjust rates without statutory constraints. The removal of interest on CRR balances increases the cost of maintaining reserves, directly impacting liquidity management and profitability. Banks must closely monitor RBI's fortnightly CRR changes to avoid penalties.
What you must do
- Update internal CRR computation systems to reflect removal of the 3% statutory floor and new rate schedule (6.25% from April 14, 2007; 6.50% from April 28, 2007).
- Cease accruing interest on CRR balances from the fortnight beginning March 31, 2007, and adjust accounting entries accordingly.
- Review liquidity buffers and contingency funding plans to manage higher CRR requirements without interest compensation.
- Ensure compliance with the revised CRR maintenance rules and exemptions as per circular RBI/2006-2007/347.
Who it affects
All Scheduled Primary (Urban) Co-operative Banks, Treasury and ALM teams of UCBs, Compliance and finance departments of UCBs
Why was the 3% statutory CRR floor removed?
The removal followed the Reserve Bank of India (Amendment) Act, 2006, which gave RBI full discretion to set CRR without any floor or ceiling, aiming to enhance monetary policy flexibility.
What are the new CRR rates for UCBs from April 2007?
CRR was set at 6.25% of net demand and time liabilities from the fortnight beginning April 14, 2007, and 6.50% from April 28, 2007, with no interest paid on these balances.
Does this circular affect interest on CRR balances?
Yes, interest on CRR balances maintained by UCBs was discontinued from the fortnight beginning March 31, 2007, as per the amendment to Section 42(1B) of the RBI Act.